The suburban Chicago retail market registered approximately 774,000 square feet of positive net absorption in 2013, despite a shock in the fourth quarter when Dominick’s vacated approximately 2.8 million square feet of retail space in the region. Although a portion of the empty big-box space is expected to be backfilled in 2014 by other players in the grocery sector-including Caputo’s, Jewel, Mariano’s and Whole Foods-the closure of the supermarket chain triggered a sharp uptick of 50 basis points in the vacancy rate to 8.9%, the highest quarterly increase since 2008, according to Newmark Grubb Knight Frank (NGKF).
Aggressive expansions by Plum Market, Whole Foods and Mariano’s aided the overall increase in retail space demand in 2013. The big-box market posted positive annual net absorption of 659,000 square feet with rents ending the quarter at $15.26/SF, triple net. The small-shop market, classically identified by unanchored and freestanding “bricks and mortar” retailers, experienced positive annual net absorption of 115,000 square feet, more than a third of which was gained in the fourth quarter. Landlords responded to this momentum, increasing average small-shop asking rents $0.41/SF during the year to $17.82/SF, triple net.
“The short-term focus will be on filling or repurposing the glut of empty big-box spaces left behind by Dominick’s,” said James Schutter, a senior managing director with NGKF Retail. “The amount of time it takes to find new tenants for the recently vacated space could be a significant factor in how the market performs in 2014. Neighboring stores in community centers where Dominick’s was an anchor tenant may see fewer sales as a result of the reduced traffic to the shopping center, which could lead to longer-term occupancy losses.”
Another challenge facing the retail market - in Chicago and nationwide - is the rise in e-commerce. This is especially true for small-shop space, where retailers who compete with firms like Amazon don’t have the economies of scale to offer lower prices.
“With internet sales up more than 10% this holiday season, retailers have been doing everything possible to drive traffic to physical stores,” Mr. Schutter said. “But consumers may think twice about making purchases online if the Marketplace Fairness Act kicks in during 2014. If tax savings are removed from the equation, traditional shopping may regain some of its popularity. We’re keeping a close eye on how it plays out.”
Although 2013 investment sales activity was down from the prior year, NGKF predicts that demand for well-located, Class A anchored shopping centers in the greater Chicago market will remain stable, with cap rates hovering in the 6.5-8% range, which is lower than both the U.S. and Midwest averages. For Class B and C anchored and unanchored centers, improved liquidity as a result of stronger leasing fundamentals, along with an uptick in 10-year treasury yields, is likely to result in higher transaction volume for investors willing to increase their risk profiles.
“The performance of the suburban retail market during a year marked by unrelenting economic uncertainty and heightened retail M&A activity has been remarkable,” said Michael Sheinkop, executive managing director. “The progress made in 2013 should not be overshadowed by the Dominick’s anomaly of the last quarter. In the longer term, we see an increase in consumer confidence propelling the market forward.”
For additional information about the Chicago market, contact Mira Matic at email@example.com.
About Newmark Grubb Knight Frank
Newmark Grubb Knight Frank (NGKF) is one of the world’s leading commercial real estate advisory firms. Together with its affiliates and London-based partner Knight Frank, NGKF employs more than 12,000 professionals, operating from more than 320 offices in established and emerging property markets on five continents.
With roots dating back to 1929, NGKF’s strong foundation makes it one of the most trusted names in commercial real estate. Its integrated services platform includes leasing advisory, global corporate services, investment sales and capital markets, consulting, program and project management, property and facilities management, and valuation services. A major force in the real estate marketplace, NGKF serves the local and global property requirements of tenants, landlords, investors and developers worldwide. For further information, visit www.ngkf.com.
NGKF is a part of BGC Partners, Inc. (NASDAQ: BGCP), a leading global brokerage company primarily servicing the wholesale financial and real estate markets. For further information, visit www.bgcpartners.com.